Market Considerations

From the economists

Evidence that social distancing is helping flatten the curve on the spread of COVID-19 and is starting to throw some support to the stock market. But that doesn’t mean the economy will bounce back to normal anytime soon, including in agriculture. RFD's DeLoss Jahnke interviews AFBF’s John Newton and University of Illinois’ Gary Schnitkey and Scott Irwin about the impact COVID-19 has had on agriculture on a special Profit Watch segment. Listen below.

The prices of nearly all Illinois farm commodities have been declining since mid-January. With the arrival of COVID-19 concerns in early- to mid-March, prices tumbled sharply lower. While wheat and to a lesser soybean prices rebounded since mid-March, corn, pork, live cattle, class IV milk and ethanol all continued to decline.

Immediate impacts of COVID-19 on Illinois farm commodities

Ethanol: When gasoline sales decline, so do ethanol sales, since most ethanol is blended and sold at the 10% to 15% level. Illinois is the third largest producer of ethanol in the US and had 14 ethanol plants in operation. COVID-19 resulted in a dramatic decrease in gasoline consumption that has driven ethanol prices down by 30% since mid-February and resulted in the recent idling of the One Earth Energy plant in central Illinois.

Corn prices: Ethanol plants account for approximately 1/3 of the demand for Illinois corn. Current ethanol production is at its lowest level in over six years and this has lowered ethanol plants’ corn bids. Corn prices have dropped by more than 10% since mid-February and the May futures contract has dropped 15%, or 61 cents per bushel, since January 14.

Pork and beef prices: COVID-19 has been driving a dramatic realignment of the supply chain for pork and beef. Prior to COVID-19, institutional buyers, corporate cafeterias, schools and restaurant chains were a large part of final demand for the meat complex. With COVID-19, institutional demand has collapsed. Supermarkets account for a much larger share of meat purchases and processing, packaging, meat cuts, and delivery chains have all had to adjust in order to meet this new direct demand at the retail level. This has created backlogs at slaughter-packing facilities even while supermarket prices have risen. Additionally, the market has been reflecting the potential risk of slaughter plants being temporarily shuttered due to COVID-19, which would result in even greater supply chain backlogs.

Dairy prices: Class IV milk has decreased by 36% and Class III milk by 26% since mid-February. Schools and other institutions were the primary buyers of milk and milk products, all mostly now closed. This disruption in the normal supply chain has resulted in back logs of fluid milk at the processor stage and plummeting prices. Additionally, as reported by Carlisle Advisors in Wisconsin, 22% to 25% of US milk production was being exported in one form or another, but border closures have largely nearly halted Class III and Class IV milk exports.

Although COVID-19 is often cited as playing a primary role in the commodity price declines, there have been several contributing factors outside of the pandemic:

Increased value of the U.S. dollar. The value of the Brazilian Real depreciated by nearly 10% and the Argentinean Peso by 6% against the USD since mid-January. This makes their soybeans and corn cheaper on the world market compared to ours.

Brazil’s record soybean harvest, combined with their devalued currency, has resulted in larger Brazil exports and a lower world price.

Pork producers have been over-supplying the market throughout 2020 in anticipation of purchases from China of a magnitude that have been less than expected.

Corn exports have been struggling due to both a strong US dollar and a large Brazil crop on its way, in addition to US farmers’ planting intentions that would indicate a large US corn crop.

Longer-term impact of COVID-19 on farm commodity prices

Decreased consumer demand can be expected to depress prices throughout 2020, as a result of lost wages and lower disposable income. As they say, “people still need to eat” but consumers will shift their preferences toward cheaper, lower-value products. Demand for fresh fluid milk, artisan cheeses, and the higher quality beef and pork cuts are all sensitive to decreases in per capita disposable income and lower family incomes are expected to depress prices for most of 2020.

Illinois crop farm net income outlook on cash-rented acres

For post-COVID-19, Illinois net farm income for the typical corn/soybean rotation farm is now forecasted to lose $73/acre on average in year 2020 across all cash-rented acres at trend yields and current harvest price projections of $3.30/bushel for corn and $8.30/bushel for soybeans. (Gary Schnitkey, University of Illinois, April 7, 2020)

Table: Corn and soybean prices, before and after COVID-19 (University of Illinois FarmDoc team, ACES. April 7, 2020)

Tables: Net income on cash-rented corn acres for a typical central Illinois farm in 2020, at forecasted harvest prices and trend yields. (Source: University of Illinois FarmDoc, ACES. April 7, 2020)